My late grandfather often told us as kids to never complain about something unless you have spent the time developing a solution. I have received a lot of feedback on my recent article about the Bermuda economy (“Recovering from recession? No, it's getting worse…” November 22, 2010) so I'd like to discuss the implications and honour my late grandfather by offering some constructive commentary and suggestions.

Somewhere along the way, lost in various political debates and muddled business commentary, Bermuda seems to have failed to focus on why it no longer grows or exhibits the boom times of the past. There are essentially two fundamental explanations for this:

1 Bermuda's economy is a victim of lower world aggregate demand. To put this simply, the developed world (think Canada, the UK and the USA), which are Bermuda's major economic trading partners, are in a period of much slower growth where their businesses and consumers are not buying things like they used to.

This can clearly be seen in the contraction of Bermuda's two main pillars of growth: tourism and reinsurance.

The first suffers from the deleveraging effects of over-levered consumers, the second from the over capacity or supply of capital in the reinsurance market. In even more simple economic terms, the demand for the services Bermuda offers the world is far lower than its capacity of supply.

There are too many luxury hotels and/or guest properties and too much capital in the reinsurance market. When supply exceeds demand by such a wide margin, prices must fall.

It is unclear if Bermuda can handle a period of deflation.

Many of the other developed nations have been able to offset this reduction in aggregate demand with trade amongst developing nations.

Sadly, Bermuda's exposure and trade with the emerging markets is minuscule at best. It is unable to tap into this area of growth to compensate for the lower level of demand of its current trade partners.

2 With lower level of aggregate demand throughout the world, competition is fierce. Countries are furiously trying to get their fair share of this shrinking pie.

As a result, this global world that we live in caters to those nations where large pools of cheaper intellectual capital offer bountiful solutions for cost cutting aggressive companies. Five percent of college graduates in the US are unemployed, double the norm. This is a highly educated portion of the workforce eager to find work and compete.

Bermuda is battling in a global world where intellectual and financial capital goes where it's treated best and offers the best returns.

So while politicians seem focused on raising payroll taxes, implementing immigration restrictions and solving a healthcare dilemma, the real issue that drives all of Bermuda's woes is the lack of demand for the Island's services and international competitiveness.

Job growth is inexorably moving to developing economies (and in some cases back to developed economies) because they are simply more competitive in terms of cost and productivity.

So how does Bermuda regain the “high ground” and reemerge as a competitive and growing country with continued job growth?

There are two basic ways to accomplish this.

The first is to try and level the playing field through political and financial policies. Government could focus on various trade barriers and immigration policies to “protect jobs”.

This would be the far less preferable route but unfortunately it is always deemed the easiest. Politicians do not get elected based on the great “sacrifices” they make but rather on promises to defend the nation from foreign problems.

It's far easier to blame certain segments of the population for taking jobs than it is to note how some local workers earn ten times more when compared to workers in emerging markets who do a similar job. It is also convenient, it would seem, to blame “irrational pricing” instead of accepting the notion of some deflationary pressure on commoditised services and therefore making the tougher decision to right-size a business in a more lean and efficient, cost-competitive way.

The second route is a lot better. It involves learning how to compete again. Investments should be made in adequate infrastructure, (think world class technology and telecommunications), and 21st century education and research, as opposed to 20th century education.

Public policy should focus on encouraging innovation, higher education and national cost competitiveness. New industries should be encouraged to promote more diversification in the economy.

This Island cannot wait for business to come, it has to go out and get it. Bermuda's average annual inflation rate over the past 30 years (4.5 percent) is more than one percent higher than the US Consumer Price Index. Irrational inflationary pressures that hamper productivity gains need to be addressed.

Bermuda needs to learn to compete the old-fashioned way on quality and price. If not the smart money will continue its migration elsewhere.

Nathan Kowalski is the chief financial officer at Anchor Investment Management. He holds a Chartered Financial Analyst (CFA) designation and Chartered Accountant (CA) designation.